Credit markets are far from panic, with valuations still close to multi-decade highs, but money managers say more caution is seeping in. — Bloomberg
NEW YORK: The malaise sweeping financial markets globally is creeping into credit markets.
Risk premiums on everything from investment-grade corporates to junk bonds are hovering near their highest levels in weeks. On Monday, investors withdrew about 40% of bond orders on several corporate bond offerings after seeing final pricing, an unusually high level of attrition.
A separate investment-grade bond sale was pulled from the market altogether last week, a rarity in that market.
In the leveraged loan market, banks have struggled to sell some debt tied to acquisitions.
Credit markets are far from panic, with valuations still close to multi-decade highs, but money managers say more caution is seeping in.
“There are signals that there may be growth issues, and it’s not being reflected in bond yields,” said Brij Khurana, a portfolio manager at Wellington Management Company.
That may be part of why debt investors are growing more cautious.
Money managers have snatched up a large number of tech bonds in recent weeks: the companies known as hyperscalers have sold about US$121bil of US dollar high-grade notes this year, up from about US$28bil on average over each of the last five years, Bank of America Corp. strategists wrote on Monday. About US$81bil of that has come since September.
“This wave of supply is an order of magnitude larger than what we’ve seen over the prior years,” said Brian Wong, a portfolio manager at the Capital Group.
“The market is starting to question who will be the winners, who will be losers, and what will be the return on that investment.”
Money managers’ growing caution was evident in bond sales on Monday, when Amazon.com Inc sold US$15bil of notes, garnering about US$80bil of orders from investors at the peak.
Once pricing was revealed, that figure fell to closer to about US$47bil, a drop of more than 40%.
The decline in orders in the end was unusually steep, in a market where attrition is usually more like 20%.
Three other offerings saw similar drop-offs in orders on Monday.
A key data point is coming this week as Nvidia Corp is due to post quarterly results.
The outlook it gives investors could be a bellwether for how artificial intelligence (AI) investment is faring.
“We are about to receive a lot of information that I think is important for justifying valuations,” said Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management.
“It’s really important to understand where AI is, and where these companies are still spending less than what they’re making or taking in-does that change?”
The average spread on a US high-grade corporate bond was about 0.83 percentage point, or 83 basis points on Monday, according to Bloomberg index data. — Bloomberg
